Gross direct tax collections collection falls over 30% in Q1FY21

Here is a detailed reading

of the gross direct tax collections so far as per North Block sources:

Experts too feel that the decline in collections was expected.

"As expected, the advance tax numbers would be hit due to the reduction in the tax rate as well as a severe business downturn. More importantly, reduction in advance tax shows that the companies foresee the entire year to remain stressed rather than merely for the first quarter of this financial year," says Amit Maheshwari, partner, AKM Global.

However, these provisional numbers continue to pose serious challenges for North Block, as finance ministry aims to clock Rs13.2 lakh crore of direct tax collections this fiscal.

On an analysis of the advance tax collections people in the know said, "the government has noted that both small and large taxpayers have seen over 30-40 percent decline in their profits, this a corresponding decline is what the government has observed in the advance tax collections,"

When it comes to dividend distribution tax (DDT) and securities transaction tax (STT)  there is a small surprise. Unlike other readings, there is an uptick in the latter's collection as seen in the table below.

But, is COVID-19 only to be blamed for the poor performance? Experts feel otherwise. Already tax collections were reportedly declining from last year onwards.

Hitesh Gajaria, partner and co-head of tax at KPMG India, said that "the fall in tax collections in Q1 of FY 2020-21 is not really surprising since the country was in a near-complete state of lockdown for a bulk of the quarter. Having said this, direct tax collections have been seeing a shortfall since last year itself. The original direct tax collection target for FY 2019-20 of Rs 13.3 lakh crore was revised downwards to Rs 11.7 lakh crore, and the actual collections during the year ended up even lower at around Rs10.27 lakh crores."

Gajaria also added, " this trend is due to a variety of factors, including the significant corporate tax cuts enacted last year, the uncertainty in the economic environment, and the deferral of the Vivad se Vishwas dispute resolution scheme from March 2020 to June, and then to December 2020. More particularly, the beneficial impact of the corporate tax cuts will be experienced over the medium term once capacity building and consumer demand pick up. What was hoped is that the rise in Economic Activity and consumption will more than compensate for the tax given up owning to the lower headline corporate tax rates. This assumption will now come under some strain in the COVID-19 Scenario. The fall in tax collections in this quarter is driven by a drop in advance tax payments by corporates."

"This will make it challenging for the government to meet this year’s targeted direct tax collection of Rs. 13.2 lakh crores. Since advance tax computations are based on estimated profits for the year, this drop reflects the lower forecasts of economic activity in the first quarter due to the lockdown, as well uncertainty about profitability for the year ahead," Gajaria added.

However, government sources did say that it is too early to mark that such low collections will continue throughout the year. "If the pandemic is contained in time and the economy picks up then the government can get close to the estimated targets." Even experts are also the same opinion.

Similar optimism is opined by Gajaria. He too adds that "this is not necessarily reflective of what will actually happen in subsequent quarters. What will be crucial is how quickly businesses are able to revive, and how soon consumer demand picks up. This is assuming that there no more crippling lockdowns re-emerge owing to the pandemic."